TaxTMI 
TaxTMI 
2026 (6) TMI 1443
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....on being run for profit making motive. 3. The relevant facts are that the assessee is a trust and running educational institution, mainly engineering and dental colleges. It is registered and claims exemption of income u/s 11 & 12 of the Act on the grounds that it is engaged in charitable activity of imparting education. The assessee follows the fee structure as prescribed under the agreement with the Government of Karnataka, wherein a portion of seats are allotted under Government/CET quota at regulated fee and the balance seats under management/NRI quota. 3.1 During the course of assessment proceedings, the AO examined the financial statements and noticed that the assessee had disclosed a substantial amount of Rs.61.15 crore as "development fee", which was credited to the Income and Expenditure Account. On further verification, it was observed that this amount (development fee) was collected from parents and relatives of students who secured admission in the institution. The AO formed opinion that there existed a direct nexus between payment of such "development fee" and grant of admission. Based on this factual matrix, the AO formed a prima facie view that the assessee was....
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....ohibition of Capitation Fee) Act. 3.5 On verification of details furnished by the assessee itself, the AO found that such collections of "development fee" were not voluntary in nature. The assessee had provided donor-wise details showing corresponding students who obtained admission, thereby establishing a clear quid pro quo. The AO therefore concluded that these receipts were nothing, but capitation fee collected in violation of law. It was also observed that the assessee had not notified any such additional fee structure to the Government, which was mandatory under the regulatory framework of Karnataka Educational Institutions (Prohibition of Capitation Fee) Act. 3.6 The AO further carried out a detailed financial analysis of the assessee over several years. It was noted that over the period, the assessee had collected following sum of development fees: Particular A.Y.2008-09 A.Y.2009-10 A.Y.2010-11 A.Y.2011-12 A.Y.2012-13 A.Y.2013-14 Development fee 18,12,36,382 19,53,10,147 20,71,16,612 20,48,65,924 27,23,55,000 61,15,42,992 3.7 The collection of development fees has resulted in huge surplus over the year which are tabulated as....
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....lly for charitable purposes i.e. education. The determination of this condition goes to the root of the matter and unless the same is fulfilled, the question of application or accumulation of income does not arise. 3.10 As such, the AO held that on careful consideration of the materials on record, it is evident that the assessee has been systematically collecting substantial amounts from students and their parents in connection with admission, in the guise of development fee or voluntary contribution and corpus donation. These receipts are directly linked with admission and therefore partake the character of capitation fee. Such collection is not only contrary to the regulatory framework governing private professional institutions but is also in clear violation of the provisions of the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act. Accordingly, the income so generated cannot be regarded as arising from activities lawfully carried out by the assessee, thereby failing the first and foremost test laid down by the Hon'ble Supreme Court. 3.11 Further, the magnitude and pattern of surplus generated by the assessee clearly indicates that such surplus is neit....
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....es that it is using the educational institution as a vehicle for profiteering, while claiming exemption under the provisions of section 11 of the Act. 3.14 Accordingly, the AO concluded that the assessee does not exist wholly for charitable purposes within the meaning of section 2(15) read with section 11 of the Act. The essential condition for claiming exemption being not fulfilled, the assessee is not entitled to exemption u/s 11 and 12 of the Act. The exemption so claimed is therefore disallowed and the total income of the assessee is brought to tax under the normal provisions of the Act in the status of an Association of Persons. 4. The aggrieved assessee preferred an appeal before the learned CIT(A). 5. The learned CIT(A) following the judgment of Hon'ble Karnataka High Court in own case of the assessee pertaining to A.Y. 2012-13 in ITA No. 554 of 2018 set aside the finding of AO and allowed the ground of appeal raised by the assessee by holding that the assessee is eligible for deduction/exemption under section 11 of the Act. 6. Being aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us. 7. The learned DR before us submitted that the....
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....finding, in our considered view, cannot be sustained in light of the fact that an identical issue had arisen in the assessee's own case for A.Y. 2012-13, wherein the AO had taken the very same view that the assessee is not engaged in charitable activity. The Tribunal, however, vide its order dated 20.03.2018 in ITA No. 1732/Bang/2017, has categorically reversed the findings of the AO and held that the assessee is a charitable institution within the meaning of section 2(15) of the Act. We further note that the aforesaid order of the Tribunal has been carried in appeal by the Revenue before the Hon'ble Karnataka High Court in Income Tax Appeal No. 554 of 2018, and the Hon'ble High Court has upheld the findings of the Tribunal. Thus, the issue now stands concluded in favour of the assessee by the decision of the jurisdictional High Court. The relevant finding of the Hon'ble High Court reads as follows: 7. We have carefully considered rival contentions and perused records. 8 This court in Kammavari Sangham has held that so long as the exemption certificate is in force, the assessee is entitled for its benefit. In New Noble Educational Society relied upon by Shri Sanma....
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.... concerned, the Apex Court has held that the registration under different statutes is also a relevant consideration while deciding the application for approval under Section 10(23C) of the Act. In the case on hand, we are not dealing with a situation where the IT Department was considering any application for granting exemption. On the other hand, the department had issued the exemption certificate and the AO on an incorrect assumption has treated the money collected by the assessee as capitation fee under the KEI (Prohibition of Capitation Fee) Act. Therefore, the said authority does not lend any support to the Revenue. This court has already taken a view in Kammavari Sangham and the same is applicable to the facts of this case. 11. In view of the above, this appeal by the Revenue must fail and hence, the following; ORDER (i) Appeal is dismissed; and (ii) Questions of law are held in favour of the assessee and against the Revenue. 9.2 Once it is settled that the assessee is a charitable institution, duly registered and covered within the meaning of section 2(15), the provisions of section 11, 12 and 13 of the Act automatically come into play.....
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....o be considered. 9.6 In the present case, it discernible from the assessment order that the assessee is incurring expenditure towards infrastructure, but it is not coming how much amount incurred towards infrastructure or other capital expenditure. As such the AO completely ignored the capital expenditure incurred by the assessee towards infrastructure and development of educational institutions, which are directly related to its charitable objects. If such capital expenditure is considered as application of income, the surplus computed by the AO would undergo substantial reduction and the allegation of excessive surplus would not survive. It is also noted that the AO has observed that after meeting infrastructure requirement assessee still accumulated fund which were invested into FDs or mutual funds yielding further income. In this regard we are of the considered opinion that the charitable trust under the provision of section 11(2) is allowed to accumulate its income if it not able to apply 85% of income received during the relevant assessment year. Such accumulation is required to be deposited and invested in specified manner. The AO has not found any violation of prescribed....
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....e provision of KEI (Prohibition of Capitation Fee) Act, and accordingly, brought the money collected by the assessee to tax. At the outset, we note that identical issue had come up for consideration before this Tribunal in assessee's own case for Assessment Year 2012-13 in ITA No. 1732/Bang/2017, wherein the Tribunal, after examining similar set of facts, set aside the finding of the AO on the premises that the there was no action initiated against the assessee by the State and that has remained uncontroverted. On further appeal by the Revenue before the Hon'ble Karnataka High Court in Income Tax Appeal No. 554 of 2018, the Hon'ble High Court has upheld the findings of the Tribunal. The relevant finding of the Hon'ble High Court reads as follows: "The AO had held that there was violation under the KEI (Prohibition of Capitation Fee) Act, and accordingly, brought the money collected by the assessee to tax. In challenge before the ITAT, the assessee has filed an affidavit stating that no action was initiated against the assessee by the State and that has remained uncontroverted. The resultant position is, the AO, based on assumption and surmise, has held that there was viola....
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.... fixed was also claimed as application of income in the year of purchases. Accordingly, the AO held that the assessee is availing double benefit for same expenditure. Hence, the AO disallowed the claim of deprecation under section 11 of the Act. 12. The aggrieved assessee preferred appeal before the learned CIT(A) and submitted that identical claim of depreciation for A.Y. 2011-12 has been allowed by the learned CIT(A). Hence, the learned CIT(A) following the decision of predecessor CIT(A) in own case of the assessee for A.Y. 2011-12, deleted the disallowances made by the AO. 13. Being aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us. 14. The learned DR before us submitted that the AO has rightly disallowed the depreciation claimed by the assessee. He submitted that the assessee has already treated the cost of fixed assets as application of income u/s 11 of the Act in the year of purchase. Therefore, allowing depreciation again on the same assets would result in double deduction, which is not permissible under the Act. He further submitted that the intent of the legislature has been clarified by insertion of section 11(6) by the Finance (No.....
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....ciation on assets is allowable even if the cost of such assets has been treated as application of income. In this regard, we place reliance on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Rajasthan and Gujarati Charitable Foundation Poona reported in 89 taxmann.com 127, wherein the view of Hon'ble High Court that the depreciation is allowable to a charitable trust to determine real income, even when the cost of the asset has been claimed as application of income. The Hon'ble Supreme Court held that amendment brought by insertion of section 11(6) of the Act is prospective in nature and applicable from A.Y. 2015-16 onward. The relevant extract is reproduced as under: 3. It may be mentioned that most of the High Courts have taken the aforesaid view with only exception thereto by the High Court of Kerala which has taken a contrary view in 'Lissie Medical Institutions v. CIT [2012] 24 taxmann.com 9/209 Taxman 19 (Mag.)/348 ITR 344'. 4. It may also be mentioned at this stage that the legislature, realising that there was no specific provision in this behalf in the Income-tax Act, has made amendment in Section 11(6) of the Act vide Finance Act....
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....or the AY 2014-15 shall also be applied for the assessment years 2015-16 & 2016- 17. Hence, the grounds of appeal filed by the Revenue for A.Ys. 2015-16 & 2016-17 are hereby dismissed. 20. In the result, both appeals filed by the Revenue for Assessment Years 2015-16 and 2016-17 are hereby dismissed. Coming to Assessee's appeal in ITA No. 1728/Bang/2025 for A.Y. 2016-17 21. We first proceed to deal with the issue raised by the assessee through Ground Nos. 2 & 5 of the appeal which are interconnected and pertain to the disallowances of claim of exemption under section 11 of the Act on long term capital gain arising on compulsory acquisition of land for Bangalore Metro Rail project. 22. The relevant facts are that the assessee trust had declared capital gains of Rs. 11,61,31,888/- during the relevant assessment year arising from transfer of immovable property on 03.09.2015. In the return of income, the assessee claimed exemption of such capital gain u/s 11(1A) of the Act. 22.1 During the course of assessment proceedings, the AO called upon the assessee to substantiate the eligibility of exemption. The assessee submitted that it had purchased two immovable properties in ....
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....the substance of the transaction was reinvestment in capital assets. It was contended that the source of funds is not relevant so long as investment in new capital assets is made. 24.2 The assessee also relied on CBDT Circular No. 72 dated 06.01.1972 and submitted that capital gains need not be directly applied if other funds are used for acquiring capital assets. It was argued that section 11(1A) is different from section 54/54F and does not prescribe any specific conditions regarding timing or source of investment. 24.3 Further, the assessee submitted that the capital gain arose on account of compulsory acquisition by Bangalore Metro Rail Corporation Ltd., and therefore the same is exempt under section 96 of the RFCTLARR Act. It was argued that merely because the claim was not made in the return of income, the exemption cannot be denied, especially when the legal position clearly supports the claim. 24.4 The assessee also contended that even if there is any shortfall in utilization of net consideration, proportionate exemption should be allowed as per section 11(1A) of the Act. It was therefore prayed that the entire addition made by the AO be deleted. 24.5 However th....
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....e), the Hon'ble ITAT, Bangalore has held as under: "... Applicability of section 11(1A) * Section 11(1A)(b) applies only when the property held under trust in part only for such purposes, is transferred. It is in the light of the provisions of section 11(1A)(a) that the present case has to be decided. The above provisions of section 11(1A) were introduced by the Finance (No.2) Act, 1971 with retrospective effect from 1-4-1962. The CBDT in Circular No. 72, dated 6-1-1972 has explained the purpose behind introduction of the above provisions insofar as it relates to section 11(1A)(a). [Para"14] * Section 11(1A) can be explained in the form of the following example. If the entire net consideration is used to acquire new asset then there is no difficulty as nothing will be taxable (Section 11(1A)(a)(i)). When cost of acquisition and improvement of the asset transferred is say Rs. 10 lakhs, the net consideration is say Rs. 20 lakhs and the cost of the new asset is Rs. 11 lakhs then Rs. 1 lakh will be deemed as income applied for charitable purposes under section 11(1A) (section 11(1A)(a)(ii)). If the cost of acquisition of the new asset is only Rs. 10 lakhs or ....
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.... purchase should also be considered as application of capital gain for charitable purpose. If that decision is applied then the difference between the sum of Rs. 2,78,38,080 which is the investment out of net sale consideration received on transfer of capital asset made by the assessee and the cost of the transferred asset would be deemed to have been applied to charitable or religious purposes. The expression 'Cost of the transferred asset' is defined in Explanation (ii) to section 11(1A), and it lays down that 'Cost of the transferred asset' means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within meaning assigned to that expression in clause (b) of subsection (1) of section 55. Thus the difference between the capital gain utilized in acquisition of new assets, viz. Rs. 2,78,38,080 and the indexed cost of acquisition viz. Rs. 2,51,22,641, viz. Rs. 27,15,449 should be considered as application of capital gain for charitable purpose which would be entitled to exemption under section 11(1). The remaining sum of Rs. 1,21,61,909.33 Ps (....
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....t change the nature of utilization. 26.3 The Ld. AR also contended that the assessee had sufficient own funds and the loan taken was backed by deposits created out of compensation. Hence, it cannot be said that borrowed funds were used independently. 26.4 Regarding Kothanur 1 property, it was submitted that even if the property was purchased prior to receiving compensation, the law does not prohibit such utilization. Judicial precedents have held that investment made before transfer can also be considered for exemption. The Ld. AR relied on decision of Tribunal in the case of Al-Ameen Educational Society, Anandraj 26 taxmann.com 250 (supra), to argue that the provisions of section 11(1A) should be interpreted liberally and not in a technical manner. 26.5 It was also submitted that even otherwise, proportionate exemption should be allowed to the extent of investment made. Accordingly, Ld. AR prayed that the exemption u/s 11(1A) of the Act be allowed and the addition made by the AO and confirmed by the CIT(A) be deleted. 27. On the contrary, the learned DR supported the orders of the AO and the learned CIT(A). It was submitted that the assessee failed to establish that th....
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....e, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset. 28.1 From a plain reading of the above provisions, the requirement of law is for the utilization of net consideration for acquiring another capital asset. The provision does not mandate a strict or direct one-to-one correlation between the exact funds received and the funds invested. The emphasis is on utilization in substances and not on the form or timing of such utilization. 28.2 In the present case, it is an admitted fact that the assessee's property was compulsorily acquired and compensation was received. It is also not in dispute that the assessee has invested substantial amounts in acquisition of immovable properties at Kothanur village. Therefore, the primary condition of reinvestment in capital assets stands satisfied. 28.3 The AO as well as Ld. CIT(A) have denied the claim mainly on two grounds. Firstly, one of the properties was purchased prior to the receipt of compensation on transfer of the property under compulso....